BofA On Treasuries: No Longer Buying Dips, Now Selling Rallies

By Michael Aneiro

Bank of America Merrill Lynch makes a subtle but significant change in strategy today, saying it’s moving from buying Treasuries on dips to selling during rallies. So no longer opportunistically shopping optimistically, but opportunistically selling pessimistically. More or less. From BofA rates strategists Priya Misra and Shyam S. Rajan:

Fundamentally, we have shifted from the camp of buying dips to selling rallies. While we are not super bearish, we have to acknowledge that many of the forces that had kept rates compressed for so long are subsiding (a Fed purchase program for nearly three years, downside risks, central bank demand, safe haven flows from Europe and bond fund inflows). Therefore we believe that 10s should settle down around 2.6-3% for the rest of the year….

Apart from better data and a different Fed reaction function, we are concerned about a continued slowdown in demand from traditional buyers. We look to sell if the current rally continues and we reach 2.4-2.5% on 10s.

When it comes to the Fed winding down its easing efforts, BofA says the critical issues are the pace of tapering its bond-buying program as well as what the Fed views to be the trigger for eventually hiking short-term rates. More from BofA:

We believe that the Fed is geared up for tapering by September and the market has priced that in…. However, the market is sensitive to the pace as was evident by the reaction to the [Fed's policy committee meeting] minutes, which suggested that half the participants were looking for an aggressive pace. Also, given the [summary of economic projections] forecasts of 6.5% [unemployment] by the end of 2014, the market is looking for clarity on what the Fed deems as enough to begin hiking.

Treasuries finished the day just slightly weaker, with the 10-year note down 3/32 in price to yield 2.586% and the 30-year bond down 2/32 to yield 3.631%, per Tradeweb data.

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There are 3 comments

JULY 12, 2013 7:16 P.M.

Frank wrote:

BofA's analysis whows why their's was a $5 stock not to many months ago. Anybody who thinks the Fed is going to "taper" in September must have a screw loose. In today's news, core prices, which exclude volatile food and energy costs, rose just 0.2% in June after rising just 0.1% in April and May.

The report suggests that while energy prices picked up in the spring—due largely to seasonal factors—the underlying level of inflation remains tame. Overall prices picked up 2.5% from a year ago—the biggest year-over-year gain in more than a year. However, core prices rose a modest 1.7%, unchanged from the prior month.

In your own publication today, it was reported:
"Inflation is too low and if it gets weaker the Federal Reserve may need to do more on the stimulus front to get price pressures back where they should be, a U.S. central bank official said Friday.

“If [inflation] drops any further from here, we are going to have to take it very seriously,” Federal Reserve Bank of St. Louis President James Bullard said in an interview with the Wall Street Journal. Price pressures are at the “lower bound” of where they should be, and “I’m a little nervous” about this situation, the official said."

JULY 12, 2013 7:59 P.M.

Mary wrote:

Yes Frank-That is a confusing article. I ask a few questions? In regard to deflation. Gold and Silver are selling off and the dollar is weaker. China is on the forefront. And if inflation gets lower how does flooding the market with cash create demand? People hunker down even when cash is cheap and jobs not plentiful.